If you're a homeowner looking to tap into the equity in your home, an FHA cash-out refinance could be the key to achieving your goal. This refinancing option allows you to replace your current FHA loan with a larger one and receive the difference in cash. Backed by the Federal Housing Administration (FHA), this type of loan provides an opportunity to consolidate debt, make home improvements, or gain more financial flexibility.
How an FHA Cash-Out Refinance Works
Unlike a standard refinance that just swaps your old loan for a new one with better terms, a cash-out refinance replaces your existing mortgage with a new, larger loan based on your home’s current value. After closing, your lender pays off your old mortgage and related fees. The remaining funds—your "cash-out" amount—are then disbursed to you, typically as a lump sum via wire transfer or check.
This extra cash can be a game-changer, whether you need to tackle major expenses or invest in your future. There are also no limitations to what you can use the cash for.
Common FHA Cash-Out Uses
Consolidate High-Interest Debt – Pay off credit cards or personal loans with a lower mortgage rate to save on interest.
Home Improvements – Renovate the kitchen, upgrade appliances, or add living space to increase property value.
Major Expenses – Cover medical bills, college tuition, or other significant financial needs.
Business Investment – Use your home’s equity to start or expand a business.
How much cash can you take out?
The FHA allows you to borrow up to 80% of your home’s loan-to-value (LTV) ratio. This means your total loan amount, including your existing mortgage balance and the cash you receive, cannot exceed 80% of your home’s value.
For example, say your home is valued at $300,000. The maximum loan amount you could qualify for would be $240,000 (300,000 x 0.80%). If your current mortgage balance is $180,000, that leaves $60,000 in cash ($240,000 - $180,000) to use for home improvements, debt consolidation, or other financial goals.
Keep in mind that closing costs and other fees will reduce the final amount you receive.
FHA Cash-Out Requirements
Qualifying for a cash-out refinance FHA loan requires meeting specific guidelines set by the FHA and your lender. Thankfully, FHA cash-out requirements don’t differ much from a typical FHA purchase loan, except a down payment isn’t required. Generally, lenders want a 620+ credit score and a debt-to-income ratio that isn’t too high.
Paddio’s minimum credit score is 620. In rare cases, a lower score may be allowed with certain compensating factors.
Here are some requirements specific to the FHA cash-out:
You Must Have 20% Minimum Home Equity
To qualify for an FHA cash-out refinance, you must have at least 20% equity in your home after the refinance. FHA allows borrowers to refinance up to 80% loan-to-value (LTV), meaning your total loan amount—including your existing mortgage balance and the cash you take out—cannot exceed 80% of your home’s current appraised value.
12 Months of Seasoning is Required
Another key requirement is loan seasoning, which refers to how long you’ve held your current mortgage. The FHA mandates that you must have had your existing loan for at least 12 months before refinancing to ensure you built up enough equity to take advantage of a cash-out refinance. If you recently purchased your home and haven't reached the one-year mark, you will need to wait before exploring this option.
You Must Live in the Home
Additionally, an FHA cash-out refinance is only available for primary residences. If you’re looking to refinance a second home or an investment property, this option isn’t available to you. Your home must be your primary place of residence to qualify. For instance, if you own a rental property but live in a separate house, you won’t be able to use an FHA cash-out refinance on the rental unit.
Mortgage Insurance is Required
When refinancing with an FHA cash-out refinance, it’s important to budget for additional costs beyond your loan amount. Remember that refinancing shouldn’t just be about getting cash. You’ll also need to cover closing costs and mortgage insurance, which can affect how much money you actually receive.
The upfront mortgage insurance premium (MIP) is a major cost to consider. FHA loans require an upfront MIP of 1.75% of the loan amount, which you can either pay at closing or roll into your loan. This fee ensures that the FHA has enough funds to cover potential defaults, but it does add to the overall cost of your refinance.
In addition to the upfront MIP, you’ll also have an annual MIP ranging from 0.45% to 1.05% of your loan balance, depending on your loan terms and LTV. This cost is spread out across your monthly mortgage payments, so it’s important to factor this into your budget.
Beyond mortgage insurance, you must account for other closing costs. These can include lender fees, title insurance, appraisal costs, and escrow charges, typically totaling 2% to 5% of the loan amount.
For example, if you're refinancing a $240,000 loan, you could expect to pay anywhere from $4,800 to $12,000 in closing costs. As part of the FHA cash-out refinance guidelines, borrowers should budget for closing costs, including upfront and annual mortgage insurance premiums, lender fees, and appraisal expenses.
What is the FACOP program? Is it legit?
The term FACOP stands for the Federal Assistance Cash-Out Program, another name for the FHA cash-out refinance. However, some online ads have misused this term to falsely promise large payouts—often claiming a set amount like $185,000—to lure homeowners into sharing personal information. In reality, cash-out refinance amounts vary based on your home’s equity, not a fixed number.
To avoid scams, always work with FHA-approved lenders and verify any offers through official channels. You can check a lender’s eligibility using the HUD Lender List.
FHA vs. Conventional Cash-Out Refinance
| FHA Cash-Out Refinance | Conventional Cash-Out Refinance | |
|---|---|---|
| LTV Limit | 80% | Up to 85% |
| Credit Score Requirement | 580+ (varies by lender) | 620+ (typically) |
| Mortgage Insurance | Required (Upfront & Annual MIP) | Typically not required if your LTV is less than 80% |
| Interest Rates | Generally higher | Typically lower |
Deciding between an FHA and a conventional cash-out refinance depends on your financial situation. If you have a lower credit score or already have an FHA loan, refinancing with the FHA may be a better choice since it has more flexible qualification requirements.
On the other hand, a conventional cash-out refinance could be the better option if you have strong credit and want to avoid mortgage insurance or qualify for a higher loan-to-value (LTV) ratio. With a conventional loan, you can remove private mortgage insurance (PMI) once you reach 80% LTV, and it automatically drops off at 78% LTV, helping save on your monthly costs.
The FHA Cash-Out Refinance Process
The cash-out refinance process begins with finding an FHA-approved lender who will review your financial details and determine your eligibility. Getting pre-qualified helps you understand how much you can borrow and what terms you may qualify for.
Next, you’ll need a home appraisal to determine your property’s current market value. This step is crucial because your home’s appraised value dictates how much equity you can access through the refinance.
Once your lender has all necessary documentation, they will process your application. To ensure a smooth process, you’ll need to provide:
Proof of income (pay stubs, tax returns, W-2s) to verify employment and earnings
Credit report and history to assess financial responsibility and ensure you meet the required score
Current mortgage statement to confirm loan details and remaining balance
Homeowners insurance details to verify coverage
By working with the right lender, staying organized with your documents, and understanding each step of the process, you can make your FHA cash-out refinance experience as smooth as possible.
How long does the FHA cash-out refinance process take?
Once you start the refinancing process, you can typically expect 30 to 45 days from application to closing. However, several factors can influence this timeline.
One of the most common causes of delay is the home appraisal. If your home’s appraised value comes in lower than expected, it can affect how much cash you can take out. A lower appraisal might require additional negotiations with your lender or adjustments to your refinancing plan.
Another potential roadblock is incomplete documentation. Your lender will require financial paperwork, such as tax returns, pay stubs, and bank statements. If any of these are missing or need further verification, it can slow down the approval process.
Additionally, lender processing times vary. Some lenders move quickly, while others take longer to complete underwriting and final approval. If you're in a hurry, it may be worth shopping around for a lender known for faster processing times.
By preparing ahead, ensuring your documents are in order, and working with a responsive lender, you can help streamline the refinancing process and get access to your cash as soon as possible.
Important Disclaimer: When pursuing a cash-out refinance, you will be obtaining a new loan with a new interest rate. Current interest rates may be higher or lower than your existing mortgage rate. Refinancing from a low interest rate to a higher interest rate could increase your overall borrowing costs and may not be advisable in all situations. It is essential to carefully compare interest rates and consider the long-term financial implications before proceeding with a cash-out refinance.
